Federal Boost May Spur Buyers of Bad Assets

"I think it's really an expert's call," says Krakovsky, who is launching a long-short credit hedge-fund called Tacticus Opportunity Fund. "Some of these securities will not recover, or maybe they will be par eventually, but it could take many, many years. It's not just about getting your money back; it's about when you're going to get your money back."

Luczkow says that while active players like Di Blasi and Krakovsky exist, they are in the minority, as other interested parties search for funds to dive back into non-agency mortgage debt.

"There has to be a huge opportunity there, because there's a 200-basis point spread," says Luczkow, a former manager of a Fannie Mae mortgage-security portfolio at Morgan Stanley(MS). "The issue today is not finding good investments; it's finding the money to make good investments."

It's unclear whether the Fed will expand the TALF program to finance mortgage assets. But Treasury's announcement last month that it no longer intended to invest TARP funds in distressed assets spooked the market, particularly among financial sector stocks.

Jonathan Scott, an associate professor of finance at Temple University, and a former CFO of the Federal Home Loan Bank of Dallas, says the government will have to provide incentives for banks to start selling their bad mortgage debt, and for buyers to re-emerge. He suggests guaranteeing the troubled assets while charging a fee to the banks that hold them, similar to last week's deal to provide emergency aid to Citigroup (C).

"Something is going to have to happen here to trigger those sales," says Scott. "And the policy initiatives that have been suggested to date haven't done it."

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